Dr.
(Prof) Sudhir Kumar Gaur
1. Pension Plans
Pension or retirement plans offer the dual benefit of investment and insurance cover. By
investing a certain amount regularly towards your pension plan, you will accumulate a
considerable sum in a phase-by-phase manner. This will ensure a steady flow of funds once
you retire. Public Provident Fund is one of the most popular retirement planning schemes in
India.
When you start contributing to your retirement early, the funds build a secure golden year
money-wise over the years. A well-chosen retirement plan can help you rise above inflation,
thanks to the power of compounding.
2. Who should opt for Pension Plans?
Every individual should invest in pension plans to secure their retired life financially. Section
80C of the Income Tax Act, 1961, covers several retirement plans and taxpayers are eligible
for tax deductions of up to Rs.1.5 lakh.
Any plan you choose must be in sync with your investment goals (or retirement plans). For
example, if you wish to retire early, then your corpus upon maturity should be enough to
support your retired life. Hence, the key is to choose the retirement plan smartly.
3. Features & Benefits of Pension Plans
a. Guaranteed Pension/Income
You can get a fixed and steady income after retiring (deferred plan) or immediately after
investing (immediate plan), based on how you invest. This ensures a financially independent
life after retiring. You can use a retirement calculator to have a rough estimate of how much
you might require after retiring.
b. Tax-Efficiency
Some pension plans provide tax exemption specified under Section 80C. If you wish to invest
in a pension plan, then the Income Tax Act, 1961, offers significant tax respite under Chapter
VI-A. Section 80C, 80CCC and 80CCD specify them in detail. For instance, Atal Pension
Yojana (APY) and National Pension Scheme (NPS) are subject to tax deductions under
Section 80CCD.
c. Liquidity
Retirement plans are essentially a product of low liquidity. However, some plans allow
withdrawal even during the accumulation stage. This will ensure funds to fall back on during
emergencies without having to rely on bank loans or others for financial requirements.
d. Vesting Age
This is the age when you begin to receive the monthly pension. For instance, most pension
plans keep their minimum vesting age at 45 years or 50 years. It is flexible up to the age of 70
years, though some companies allow the vesting age to be up to 90 years.
e. Accumulation Duration
An investor can either choose to pay the premium in periodic intervals or at once as a lump
sum investment. The wealth will simultaneously accumulate over time to build up a sizable
corpus (investment+gains). For instance, if you start investing at the age of 30 and continues
investing until you turn 60, the accumulation period will be 30 years. Your pension for the
chosen period primarily comes from this corpus.
f. Payment Period
Investors often confuse this with the accumulation period. This is the period in which you
receive the pension post-retirement. For example, if one receives a pension from the age of
60 years to 75 years, then the payment period will be 15 years. Most plans keep this separate
from accumulation period, though some plans allow partial/full withdrawals during
accumulation periods too.
1
Dr.(Prof) Sudhir Kumar Gaur
g. Surrender value
Surrendering one’s pension plan before maturity is not a smart move even after paying the
required minimum premium. This results in the investor losing every benefit of the plan,
including the assured sum and life insurance cover.
4. How a Retirement Plan Works
Example:
Priyanka is 32 years old with an expected lifespan of 80 years. Her current salary is
Rs.50,000 and she wishes to retire at the age of 60. She is looking for a monthly pension of
Rs.30,000 post-retirement. How much do you think she should invest until the age of 60 to
meet her investment goals?
Priyanka will need a corpus of Rs.4.05 crores to receive an income of Rs.30,000. Let us
assume a long-term return of 12% till age 60 and 5% after that, with 6% inflation rate. Based
on these figures, she must invest Rs.14,820 monthly for the next 28 years. If all goes
according to plan, Priyanka is going to lead financially secure golden years. You may also
use this retirement planning calculator to arrive at a number.
5. Pension Plan Types in India
It is never too early or late to start investing in retirement plans. However, it is sooner, the
better. Whether you are salaried or entrepreneurial, there is a slew of pension plans you can
choose from as listed below.
SL Plan Type In Detail
No.
1 Deferred Annuity Systematic premium or one lump sum premium over the tenure
Pension begins after completing the term
No taxation (unless you withdraw the corpus)
2 Immediate Annuity Only lump sum investment allowed
Pension begins immediately after investment
Income tax exempts tax on the premiums
The nominee can claim the pension or the corpus after the passing
of policyholder
3 Annuity Certain The pension is disbursed for a specific period
The policyholder can choose a period (say, age 65-70)
The nominee can claim the pension after the demise of the
policyholder
4 With Cover Pension Comes with a ‘cover’ policy – policyholder’s dependents are
Plan entitled to a lump sum after he/she expires
The insurance amount is not large a most of the premium goes
towards building the corpus
5 Life Annuity Pension paid till death
‘With spouse’ option – spouse continues to receive after the
policyholder’s demise
6 National Pension Launched and managed by the Central Government
Scheme (NPS) Your money will be distributed in equity and debt markets as your
preference.
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Dr.(Prof) Sudhir Kumar Gaur
Withdraw 60% when you retire, and the rest should be used to buy
the annuity
The tax levied on the 20% of the corpus you withdraw upon
maturity
7 Pension Funds Better returns once it matures
Regulated by the government body, Pension Fund Regulatory &
Development Authority (PFRDA)
Currently, six fund houses in India are authorised to offer pension
funds. Example, SBI
8 Guaranteed Period Annuity disbursed for specific terms like 5 to 20 years.
Annuity Plan
6. Tips to remember before buying a Pension Plan
a. Estimate your future financial goal(s)
b. Consider your current income and fix an amount to invest in the plan
c. Research the available plans, read the benefits offered post maturity and choose
accordingly
d. Understand the product thoroughly and then decide on investing
e. Do not choose a product only because of tax benefits
If you think any of the pension mentioned above plans suit your investment goals and current
income, then start investing!
